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Schering-Plough's 2007 Net Falls on Hefty Charges
13 Feb 08
U.S. pharma major Schering-Plough ended 2007 with substantial fourth-quarter and full-year net losses related to its US$11-billion acquisition of Organon BioSciences (Netherlands).
Global Insight Perspective | | Significance | In contrast to its 2006 results, Schering-Plough has produced less than impressive net and operating profit figures for 2007. The company's underlying good performance, however, has been obscured by hefty charges related to its Organon acquisition. | Implications | Despite the 2007 blip in performance related to the acquisition, Schering-Plough is, in Global Insight's opinion, in a remarkably good position to face future challenges thanks to the new diversification of its business. | Outlook | The main challenges looking ahead are not reflected in the company's 2007 results as they came about after the start of 2008: disappointing results from the much awaited ENHANCE clinical trial of cardiovascular drug Vytorin (ezetimibe/simvastatin) threaten to unravel the positive foundations for sales growth of the company's cholesterol joint venture (JV) with Merck & Co. (U.S.). |
Schering-Plough Posts Q4 Net Loss on Organon Acquisition Charges Schering-Plough has reported a net loss of US$3.3 billion and net loss available to shareholders of US$3.4 billion for the fourth quarter of 2007 as the company's acquisition of Organon took its toll on earnings. Operating loss reached US$4.1 billion for the fourth quarter and US$3.9 billion for the full year as the company's R&D spending (including acquired in-process R&D) swelled to US$4.6 billion in the fourth quarter and to US$6.9 billion for the full year. Still, there were strong positives in the company's latest results offering. Net sales climbed 40.5% year-on-year (y/y) in the fourth quarter and 19.8% y/y for the full year, as the US$626-million sales figure attributed to Organon were counted in fourth-quarter and full-year results. Schering-Plough: Selected Results, 2007 | | | Q4 | 2007 | | | US$ mil. | % Growth Y/Y | US$ mil. | % Growth Y/Y | Net Sales (incl. US$626 mil. from Organon) | 3,724 | 40.5 | 12,690 | 19.8 | Adjusted Net Sales (incl. 50% of Cholesterol JV Sales) | 4,446 | 39.3 | 15,249 | 21.9 | Pharmaceutical Sales | 2,963 | 34.0 | 10,173 | 19.0 | Consumer Health Care | 254 | 24.0 | 1,266 | 13.0 | Animal Health | 507 | 117.0 | 1,251 | 37.0 | Cost of Sales | 1,566 | 71.1 | 4,405 | 19.2 | Selling, general and administrative (SG&A) | 1,634 | 0.3 | 5,468 | 15.9 | R&D (incl. acquired in-process R&D) | 4,609 | 603.4 | 6,680 | 205.3 | R&D as % of Sales* | 123.8 | 99.2 pp higher | 52.6 | 31.9 pp higher | Operating Income* | -4,085 | N/A | -3,863 | N/A | Operating Margins* | N/A | N/A | n/m | N/A | Net Income | -3,326 | N/A | -1,473 | N/A | Source: Company/Global Insight. *Global Insight calculations
#compared to losses of US$146 million and US$9 million for the fourth quarter and full year of 2006 respectively. |
The Organon acquisition has propelled Schering-Plough to a global leadership in animal health products as well. In the fourth quarter, animal health products jumped by 117% y/y thanks to a sales boost from Organon's Intervet unit. While their contribution in terms of absolute sales remains modest, the company's increased presence in this market provides an important diversification of its portfolio and reduces its vulnerability to P&R pressures for human drugs. Schering-Plough's cholesterol JV with Merck again made a strong contribution. Its sales climbed 27.3% y/y in the fourth quarter and 34.2% y/y for the full year. Sales of the JV are recorded as equity income by both partners. In the fourth quarter, Schering-Plough recorded US$556 million equity income, up 40% y/y. Cholesterol JV, 2007 | | | Q4 | 2007 | | | US$ mil. | % Growth Y/Y | US$ mil. | % Growth Y/Y | Total Net Sales | 1,400 | 27.3 | 5,100 | 34.2 | Source: Schering-Plough |
Elsewhere, strong growth was recorded by Remicade, whose fourth-quarter and full-year sales jumped by 35% and 33%, respectively. Full-year double-digit growth was also achieved by all of the company's top-seven products, except PEG-Intron, but even the latter managed double-digit sales increases in the fourth quarter. Schering-Plough: Product Sales, 2007 | | | Q4 | 2007 | US$ mil. | % Growth Y/Y | US$ mil. | % Growth Y/Y | Remicade | 455 | 35 | 1,648 | 33 | Nasonex | 271 | 7 | 1,092 | 16 | PEG-Intron | 239 | 15 | 911 | 9 | Temodar | 234 | 23 | 861 | 22 | Clarinex/Aerius | 174 | 6 | 799 | 11 | Claritin Rx | 93 | 19 | 391 | 10 | Avelox | 115 | 12 | 384 | 26 | Integrilin | 91 | 7 | 332 | 1 | Rebetol | 71 | -6 | 277 | -11 | Caelyx | 66 | 33 | 257 | 25 | Intron A | 57 | - | 233 | -2 | Subutex/Suboxone | 57 | 51 | 220 | 8 | Proventil/Albuterol CFC | 41 | -25 | 207 | 2 | Asmanex | 41 | 16 | 162 | 57 | TOTAL PHARMACEUTICALS | 2,963 | 34 | 10,173 | 19 | Consumer Health Care | 254 | 24 | 1,266 | 13 | Animal Health | 507 | 117 | 1,251 | 37 | Source: Schering-Plough |
Outlook and Implications Schering-Plough took a major risk with the US$11-billion acquisition of Organon BioSciences in 2007, though it has proved to be a risk worth taking. The contribution from Organon sales in the fourth quarter has provided a welcome boost to the company's overall sales. The deal has also provides some much needed diversification to Schering-Plough's portfolio and pipeline, including a new presence in women's health and anaesthesia/psychiatry and a stronger presence in animal health. The acquisition is expected to produce synergies of around US$500 million per year over the first three years. Savings and restructuring potential aside, the Organon deal has reduced Schering-Plough's dependence on the performance of its cholesterol JV with Merck. This has come just in time: the delayed release of the ENHANCE study results and their largely negative slant (i.e., Vytorin was no more effective than off-patent simvastatin in reducing plaque build-up in arteries) have already undermined prescription trends for both Vytorin and Zetia (ezetimibe) in the United States. Although the company claims that prescription decline appears to have stabilised over the recent weeks, the ENHANCE effect could be felt for months to come. Full results of ENHANCE are due to be released in March, but it could be only in 2011—when detailed survival comparison data are published—that Vytorin and Zetia receive the clinical boost that they need. In the meantime, weakened confidence in Vytorin's efficacy and the appeal of cheaper generic simvastatin are expected to produce a downward pressure on sales. Luckily for Schering-Plough, it is not "just a Vytorin/Zetia company" anymore and has other product growth venues to explore. Key pipeline products to watch for near-term sales growth are Phase III thrombin receptor antagonist (TRA) for atherosclerosis and investigational HIV drug vicriviroc.
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